Leaked documents reveal global banks helped launder US$2 trillion

The global banking industry has been dealt a crushing blow after revelations of money laundering and criminal involvement, carried out by some of the world’s largest banks.

Approximately 2,100 suspicious activity reports (SARs) were leaked to the International Consortium of Investigative Journalists (ICIJ), showing that as much as US$2 trillion (A$2.73 trillion) in transactions between 1999 and 2017 related to senior bankers enabling fraudsters to move money between accounts, with the full awareness that funds were being generated, or used, criminally.

Deutsche Bank and JP Morgan accounted for the lion’s share of disclosed funds with almost US$2 trillion transacted by the two banks.

Five banks with over a million people employed were named in the leaked documents including JPMorgan Chase, HSBC, Standard Chartered, Deutsche Bank and Bank of New York Mellon.

The SARs first originated from the US Financial Crimes Investigation Network (FinCEN), an agency forming a part of the US Treasury and tasked with tackling money laundering.

Australian banks are also embroiled in the scandal. Macquarie Group (ASX: MQG) and Commonwealth Bank (ASX: CBA) are facing fresh scrutiny (following a separate grilling they received in a domestic royal commission into banks last year) after it emerged they fell short of anti-money laundering laws and allowed overseas banks to funnel around $US167 million (A$227 million) in illicit funds to through the two banks.

On a more positive note, although the sums of money involved are in the trillions, the ICIJ said that less than 0.02% of the total of 12 million SARs were related to wrongdoing.

Persistent problem

In its report, the ICIJ said “big banks shift money for people they can’t identify and, in many cases, fail to report suspect transactions until years after the fact”. However, the consortium did add that the documents “are not necessarily evidence of criminal conduct or other wrongdoing.”

Meanwhile, other source with directly privy to the leaked documents, were far more scathing and characterised the revelations as “how the giants of Western banking move trillions of dollars in suspicious transactions, enriching themselves and their shareholders while facilitating the work of terrorists, kleptocrats, and drug kingpins.”

The leaked documents also mentioned several criminal organisations including Al Zarooni Exchange, an entity sanctioned by the US Treasury in 2015 for laundering funds for the Taliban.

Some of the banks named in the ICIJ’s report continued to work with “mobsters, fraudsters or corrupt regimes” even after they were warned by US officials that they would face criminal prosecutions for doing so.

Parrying accusations

Within hours of the ICIJ’s report and the leaked documents being distributed, several banks involved in the scandal rushed to parry the accusations.

“The reality is that there will always be attempts to launder money and evade sanctions; the responsibility of banks is to build effective screening and monitoring programmes to protect the global financial system,” Standard Chartered stated.

“We take our responsibility to fight financial crime extremely seriously and have invested substantially in our compliance programmes.”

Alongside the leaked FinCEN files, the ICIJ also obtained more than 17,600 additional records from insiders and whistle-blowers, court files, freedom-of-information requests and other sources.

The organisation confirmed its team interviewed “hundreds of people”, including financial crime experts, law enforcement officials and crime victims.

In its response, Germany’s Deutsche Bank explained that the ICIJ report showed “a number of historic issues” and said, those relating to Deutsche Bank are “well known” to local regulators.

“The issues have already been investigated and led to regulatory resolutions in which the bank’s co-operation and remediation was publicly recognised,” Deutsche Bank said.

According to former senior US Justice Department official and financial crimes prosecutor Paul Pelletier, the FinCEN leak indicates that financial institutions have effectively “abandoned their roles as frontline defences against money laundering”.

Market impact

The news hit banking shares hard with HSBC shedding 25% in early Asian trade on Monday and tipping its share price to their lowest level since 1998 – coincidentally, the start of the SAR reporting period. So far this year, the bank’s stock is down 50%.

The bank with the most exposure to the scandal, Deutsche Bank, saw its shares tumble 9% in European trade to an all-time low of €7 per share, continuing on its determined decline, which started back during the Global Financial Crisis in 2007 when its shares were trading at €108 per share.

Last week’s news is expected to jolt other banks in the sector for fear of more revelations and almost certain regulatory action in multiple countries.

Further problems could also arise if the aforementioned banks suffer steep price falls.

Perceived balance sheet weakness and/or imminent regulatory action could potentially weigh on banks’ operations and leave them undercapitalised, thereby raising the prospect of government-sponsored bailouts in a worst-case scenario.